Options Basic

Main terms and strategies in options trading

Options and Options types

Option - a contract giving the buyer the right, but not the obligation, to buy or sell an asset at a specified price (Strike Price) before the Expiration. The buyer pays a Premium to the seller for this right.

Order - a request to buy or and offer to sell an asset at a specified price (Strike Price) made by a user, awaiting confirmation from another user to complete the trade contract.

Call Option - a contract giving the buyer the right to buy an asset at a Strike Price before the Expiration. Buyer can profit if the asset's price rises above the Strike Price (so he buys lower), while the seller earns a Premium upfront and benefits if the price stays or falls.

Put Option - a contract giving the buyer the right to sell an asset at a Strike Price before the Expiration. Buyer can profit if the asset's price falls below the Strike Price (so he sells higher), while the seller earns a Premium upfront and benefits if the price stays or rises.

Main terms

Strike Price - the price at which the asset can be bought (call) or sold (put) if the option is exercised.

Premium - the cost paid by the buyer to the seller when the option is created. It’s the price for owning the option and having the right to exercise it.

Expiration - the last moment when the option can be exercised. If the option is not exercised by the buyer it becomes worthless and the seller can redeem their provided asset.

Exercise - the action of using the right to buy (call) or sell (put) the asset at the Strike Price. This can be done by purchasing the actual asset at the Strike Price (Physical Settlement) or receiving the profit in cash, which is the difference between the Strike Price and the market price (Cash Settlement).

Option Size - is a fixed amount of tokens traded per one option contract. For calls, the seller provides this amount of tokens as collateral. For puts, the buyer sells this amount of tokens if the option is exercised.

These are the main terms, learn more about options trading strategies next!